Committee for a Responsible Federal Budget
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Automatic Enrollment in Private Group Disability Insurance: Evidence to Date and Prospects for the Future

by Mark F. Meyer

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Introduction

The Benefits of Private Group Disability Insurance

The probability that an individual of working age will suffer a health condition preventing that person from working for longer than a month is high. “The sobering fact for 20-year-olds is that more than 1-in-4 of them becomes disabled before reaching retirement age” (SSA 2019a).

A disabling incident can occur anywhere and at any time. It could be an accident at work, or on the way to work, or shopping, or working around the house, or on vacation. It could be caused by a relatively common virus where the body’s immune response is inadequate, or a treatment-resistant infection. It could arise from an unknown genetic condition that gets activated by an environmental circumstance or merely as an individual ages. Every currently healthy person faces the possibility of her or his health deteriorating to the point where normal, everyday functions are significantly impaired.

The first response to an impaired health condition, of course, is to get appropriate medical treatment. Private health insurance, when available, or public health insurance programs such as Medicaid and Medicare exist to pay those providing health care. Critical illness insurance may also be available to the affected individual. But if the individual is employed, some of them will experience an extended period of unemployment during treatment and recovery. Medical insurance does not cover lost income during treatment and recovery.

The affected family might have savings to draw upon during this period, or there may be another person that can earn income. Most American families, however, have very limited savings to tide them through a period of no, or significantly reduced, income. Often, the other employed or potentially employable persons in the family may have to cease employment or reduce hours to care for the affected individual. If spouses were both working and one suffered a disabling incident, the loss of income could still be significant. This lack of income and savings during a period when the affected individual cannot work, particularly if the episode might be extended, places severe economic and emotional stress on the affected family. An extended period of unemployment due to poor health can deplete savings targeted for retirement, leading to financial stress in the future. 

There are public sector programs designed to supply families with financial help, particularly to replace the income lost during a period of treatment and recovery from an adverse health condition. Chief among the public sector programs is Social Security Disability Insurance (“SSDI”). This program, however, generally replaces a relatively small portion of the income lost and requires months of waiting as the individual works through the application and approval process. Programs such as Temporary Assistance to Needy Families (“TANF”) and others are also available. Workers’ compensation payments may also be available, but these would be restricted to disabilities arising from the workplace. Sick leave and short-term disability insurance may also be available to affected employees, but by design these are limited in time. 

Private disability insurance (“PDI”), particularly employer-sponsored long-term group disability coverage, is an important and meaningful supplement to private savings and public welfare programs. Long-term PDI is often integrated with short-term disability programs, and together they work to provide financial assistance to affected families early in the disability episode when it can significantly ease financial worries and stress. PDI can also provide substantially more financial assistance to families than the SSDI program. Over 70 percent of PDI programs surveyed, for example, replaced 60 percent or more of annual earnings. In March 2019, the median maximum monthly benefit amount was $10,000 (BLS 2019b, Tables 29 and 30, private industry workers).

Perhaps as meaningful as the financial assistance provided by PDI coverage, private insurance carriers work with the affected individual (and family members), health care providers, and the employer to get the individual back on the job. This can entail specific therapies to aid and possibly speed recovery as well as working with the employers to implement workplace accommodations. As currently structured, the SSDI program provides little support to help affected individuals get back to work (Bardos, Burak, and Ben-Shalom 2015, 1-2). Moreover, the return-to-work support it can provide arrives months later than is possible under PDI coverage.

In prior work, economists David F. Babbel and Mark F. Meyer outlined evidence that affected individuals covered by PDI programs return to work, or return to work more quickly, than individuals not covered by PDI (Babbel & Meyer 2016). They have also presented analyses and evidence that PDI coverage reduces federal and state expenditures on programs such as SSDI, Medicaid, Medicare, TANF, etc. (Babbel & Meyer 2013, Babbel et al. 2011).  

Out of this analysis and evidence, Babbel & Meyer (2016) proposed that allowing for the automatic enrollment of employees into PDI would benefit affected employees and their employers by reducing financial stress and accelerating a return to work, as well as reducing federal and state expenditures on SSDI and other programs. They projected that increasing the portion of employees covered by PDI from approximately one-third in 2015 to between 50 and 55 percent could reduce federal expenditures on SSDI, Medicaid, Medicare, and TANF by at least $2 billion per year as a result of the affected individuals recovering soon enough to avoid entering the SSDI system or exiting the SSDI system earlier. There would also be substantial savings for states.  

In 2016, one of the major perceived impediments to automatic enrollment in PDI was uncertainty on the reach of state laws requiring written notice and assent for deductions from employees’ payroll. In December 2018, the Department of Labor issued a letter holding that the Employee Retirement Income Security Act of 1974 preempted state laws on deductions for disability benefit programs, thereby clearing away some of the uncertainty regarding automatic enrollment in PDI.

Given the probabilities of an extended period of disability and the resulting deleterious effects of the financial stress, why did only 34 percent of private industry workers have access to long-term disability insurance programs in March 2019? (BLS 2019b, Table 16, private industry workers). This paper will take a closer look at the economics and institutional characteristics of private long-term disability insurance coverage in the United States in 2019 and offer some suggestions for increasing the proportion of workers covered by PDI.

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